I'm Lead Analyst at European Energy Review and consultant to a number of governments & institutional investors, most recently as Senior Research Fellow, Netherlands Institute for International Relations (Clingendael), I was previously Senior Research Fellow at ETH Zurich working on energy and political risk. I started work in the City of London, advising on energy markets and political risk, as Senior Energy Analyst at Datamonitor for leading global utilities, and headed up the Global Issues Desk at Control Risks Group, specializing in political risk, geopolitics and security analysis for multinational companies, governments and institutional investors. I was also seconded to work in Washington, D.C., to enhance CRG's political risk offerings in North America, having previously worked as an energy consultant at Weber Shandwick Worldwide. My initial stomping ground was British Parliament, serving as Policy Director to the largest All Party Parliamentary Group. Contact m.n.hulbert.03@cantab.net

Why European Shale Is Totally 'Fracked'

Russia's President Vladimir Putin (R) and ExxonMobil Chairman and CEO Rex Tillerson Wayne (L) attend at the ceremony of the signing of an agreement between state-controlled Russian oil company Rosneft and ExxonMobil in the Black Sea port of Tuapse on June 15, 2012. (Image credit: AFP/Getty Images via @daylife)

When we discuss European shale, the typical questions that tend to crop up are which markets, how much can be had, and how fast? All perfectly valid thoughts, but they rarely bother to ask the broader international question; does it actually matter? That’s the single most important question for the EU to ponder, precisely because the downside risks to developing European shale remain more formidable than anywhere else on earth. Simply put, shale gas isn’t going to be a serious prospect on Charlemagne’s turf any time soon. Europe needs global gas fundamentals to go its way elsewhere, or it risks ending up back at square one, bent over a Russian pipeline.

Let’s put aside the fact that European rotary rig counts only number around 120 compared to 2,000 in the US, 700 in Canada and 450 in Latin America, or that Europe has no serious in-house fracking expertise, ropey corporate finances, unclear mineral rights and ‘nimbymania’. A 10% fall in European gas demand (2011-12) hardly helps either, but it’s in the political realm that most concern rests to get shale going across Member States.

Despite sitting on 180tcf of shale, France buried the shale idea deeper than their nuclear waste sits in the Champagne region. The Netherlands doesn’t need to bother with shale given they still have Groningen fields to play with. Germany remains clinically schizophrenic on energy, splitting its energy mix between lots of wind and even more lignite coal, using Russian gas to fill any residual (Nord Stream) gaps. That doesn’t leave much room for North-Rhine Westphalia shale plays. Over in the UK, it’s only a handful of Conservative parliamentarians who think shale might offer a British version of the US shale revolution in North West England. Sweden has no such delusions despite sitting on larger (41tcf) prospective reserves. Further North, Norway has played with a very conventional bat so far keeping its 83tcf of shale under wraps; Southern Europe hasn’t even bothered looking. Spain remains plugged into Algerian production, while Italy has been oversupplied with Russian and on-going Libyan deliveries.

Even where the political desire to develop shale for those closer to the Russian border is supposedly more pressing, the geological viability of shale plays remains deeply circumspect in Poland, Austria, Romania, Hungary and Ukraine. Go to any energy conference in the East, and you’ll hear a barrage of political bluster as to why Russia’s gas stranglehold is about to be broken. Two minutes after you get ‘off stage’, you’ll be pulled to one side by industry players telling you a more concerning reality – ‘we’ve been looking at the rock formations for years; they’ve never looked convincing.’ Even Eurogas, the gas industry lobby in Brussels, remains very cagey as to how much credible shale potential it thinks EU27 has.

The ‘market’ solution to this was to enlist US majors to replicate the shale revolution in America, most of whom seemed pretty happy to pay seriously over book for shale assets in 2008/9. Chevron and ConocoPhillips went into a number of CEE markets, Marathon Oil went into Ukraine, and Exxon Mobil turned up in Hungary and Poland. You’d think with that kind of firepower knocking around, the shale ground would rapidly start moving, but the blunt fact shows that as quickly as they entered new markets, many have since left. Some might come back if wildcatters and clapped out national European entities manage to strike serious shale, but a gaping IOC absence wasn’t supposed to be part of the CEE script. They were supposed to be the guys doing the ‘heavy drilling’ and ‘shale lifting’.

Marathon was first to leave Ukraine’s supposed 1,120bcm of gas in the ground in 2008, citing an ‘uncertain legislative environment’. Even now, Kiev is struggling to entice new oil majors back in through governmental memoranda of understanding. Royal Dutch Shell and Chevron have signed up, but question marks remain as to the long term commitment given deep seated domestic pricing problems. Exxon didn’t take long to leave Hungary in 2009, with initial tests around the Mako Basin yielding disappointing results. More worryingly, Rex Tillerson has just pulled exactly the same stunt in Poland after drilling a total of two wells in search of Warsaw’s 346-768bcm of recoverable reserves.

Exxon’s move raises two very awkward prospects for CEE states to consider. The first is that Poland’s shale geology might prove to be genuinely useless. That would be a major blow to CEE shale prospects, given that Poland was supposed to be the ‘shining shale light’ in the region; it’s now up to smaller players such as Hutton Energy and San Leon alongside PNGiG to prove Exxon wrong. The second, more sinister factor is that Russia still casts a very long political shadow across all CEE and South East European states. No sooner had the Houston based super-major signed agreements to develop West Siberian tight oil plays in Russia, than it pulled the plug on Poland. Exxon clearly decided it has far bigger Eurasian fish to fry going after Russian Arctic oil. Poland wasn’t going to get in the way.

As Shell is no doubt about to find out in Ukraine, developing CEE shale and Russian upstream reserves isn’t going to be an either / or option. You either do business in Russia or business in CEE – not both. Moscow will do everything in its power to prevent shale developments for those perched close to its borders, a logic that Bulgaria seems to have understood by killing any shale developments on first sight of domestic opposition. Things are going pretty badly in the Carpathian-Balkan Basin (538bcm) straddling joint reserves of Bulgaria, Hungary and Romania. Bucharest has actually followed ‘Sofia’s suit’ and imposed an outright moratorium on any further shale developments within its borders. The new centre-left Ponta government is far closer to Russia than its Basescu predecessor; over in Prague, the Czech upper house is the process of pushing through a shale ban having cancelled previous overseas contracts.

Obviously this is all being couched in ‘environmental’ terms, but the underlying political reality is that CEE and South East European states are buckling under Russia pressure, most of whom remain entirely dependent on Moscow to keep warm in the winter. That’s creating major policy consistency problems for the likes of Chevron, who’ve been far more patient and resilient sticking to European shale plans than most. Irrespective of on-going Russian needling, every time the ballot-boxes are opened in CEE / SEE states, you face the very real risk of Muscovite poodles being elected. Shale moratoriums inevitably follow; a very costly (and tedious) pattern for IOCs to bother with – particularly as most of them are more than happy to take a leaf out of Exxon’s book and follow the ‘Eurasian money’. That means putting Russian oil first, Russian oil second, Russia oil third, with European shale coming in as a miserable consolation prize for those who missed President Putin’s Arctic opening.

But the real culprit in this story isn’t so much the low hanging political fruit of Central and South East Europe facing an uphill geological and geopolitical shale battle, but the raft of Western European states that have taken shale off the table. That’s the last thing they should be doing to maintain any serious optionality over Russian supplies – not just for their own resource base, but to keep feeding spot market liquidity that has done some much damage to the Russian supply model (and pricing) across Europe of late. What started off as a mild wholesale ‘NBP irritation’ for Gazprom in the UK, has spread all the way to the Russo-German (oil indexed) border price by letting new players take market share, undercutting their more cumbersome ‘oily’ elders in Europe all the way. With nearly 50% of physically traded gas in Europe being done on spot market formulas last year, gas prices were actually starting to be based on gas fundamentals in Europe. So much so that Gazprom finally agreed to contractual revisions with Germany’s E.On.

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It’s a two way street. If you give Russia money for their gas, less chance they will collapse and be a problem on the border.

Plus why should they risk screwing up their own water supply, etc if they can just let the Russian’s do it. Western European production of specialty foods and wines is a vital part of their culture. Plus it has yet to be shown that these wells are even cost effective given the rapid drop off in production seen at many of them.

Thanks for the comments; try not to see it as a cold war issue, it’s more about what’s smart for EU27 energy policy (which in reality, and certainly on shale = individual member states). No one should ever complain about Russian monopolisation of rent and routes to Europe, they are merely doing what any producer in that position would do – it doesn’t mean Europe shouldn’t develop alternative options though.

The Russian implosion point is actually very interesting, and one that should get closer attention for key producer states. In this instance, oil is the money that sticks Russia together, gas is the power – so to speak. Marginal costs on European shale plays no doubt a potential problem – I suspect the further it develops, the more Poland will try and drive it through as a national priority rather than worrying too much about the market angle if they can. p.s. parma ham and chianti. Splendid.

If Polish shale is as doomed as you say, then please explain why the stock of the explorer with the most acreage in Poland, San Leon Energy, has just soared ~60% since June 18 on a run of good geological data.

Additionally explain why nobody is following Exxon out of Poland, and why we should not think that the reason Exxon left is because it is beholden to Russian gas partners who are doing everything to undermine Polish shale.

Everyone knows the majors did not pioneer American shale – it was wildcatters. Same goes for Poland. So why are you emphasising the role of majors?

And by the way, the wildcatters in Poland – San Leon, 3 Legs, FX Energy, Aurelian and others all have leadership from US hydrocarbon veterans. So on this point your dichotomy of Europe v. America is false.

With respect, I find your article way too tendentious to be credible. I appreciate you need to make a strong case to publish a compelling piece, but you have both cut corners and gone too far and have achieved quite the opposite.

Great comments – I’m pleased they have been raised, in fact, I’d have been a touch dissapointed if they hadn’t.

I’m not saying Polish shale is doomed, not by any measure. I am saying it’s going to be far harder than originally envisaged to bring shale to market – we’ll put aside the EPIC EIA revisions on Polish shale estimates, even at 300-700bcm it’s obviously still worth looking at. If you read the article a little more carefully, I am suggesting the primary reason Exxon upped sticks from Poland, was indeed broader considerations it had vis-a-vis Russian concessions. On that, we don’t disagree.

Financing, again, the ropey finances relate to European national players in the piece. Corporate credit ratings (like it or not) are little more than reflection of sovereing ratings – money is expensive, trust is low in Europa. Whether some of the US wildcatters that were indeed so succesful in the America have deep enough pockets to drive through serious shale developments in Europe without IOC help, I’d very much doubt – particularly as many of the shale plays in the US are currently racing against the write down clock.

What’s actually very dangerous in all this is that Poland (and others) are overplaying their hand with this far too early with Russia. That could prove to be a very very costly mistake indeed if things don’t pan out. My guess is US could well be providing Europe more gas by 2020 or so, than we’ll out of our own formations.

As for this column, I make no bones about calling a spade and spade – if it ends up a shuvel, it should still give folks plenty to reflect on and think about. Best, Matthew Hulbert

Thank you for a sportsmanlike reply to what was an oppositional comment.

You added: “What’s actually very dangerous in all this is that Poland (and others) are overplaying their hand with this far too early with Russia.”

What exactly do you mean “they’re overplaying their hand with this far too early with Russia.”

I just don’t get this because over 20% of the exploration licenses in Poland have gone to Russian companies, which is pretty darn generous given the politics. It is Russia that has built a Baltic pipeline to Germany so as to avoid Poland – it would be strange if the Poles did not respond by attempting to build up a modicum of self-sufficiency.

As to your financing issue – we all know that historically the US has been debt-heavy whereas Europe has been government heavy. Norway, Holland and the UK did not develop the North Sea fields thanks to corporate bonds but thanks to state stimuli. Poland is now following the same model. Finance was not an issue in the North Sea in the 1980s, so why should it be an issue in the EU’s fastest-growing economy (Poland) in the 2010s?

What we have had on the Polish shale story is a case of massive media bipolar disorder, starting out euphoric then going depressive. You know which mood I think this article was in ;-) The reality of Polish shale is somewhere in between. Read these comments about the phenomenon, from San Leon Energy: http://www.naturalgaseurope.com/san-leon-energy-shale-gas-reality-space

Thanks for the follow up – in terms of the dangers, it’s broadly in the political realm. As we note of the ‘conferences in the East’, you see a lot of very cheap talk in CEE states about shale being the salvation. I very much hope it is, but I’d also make sure I keep Russia vaguely onside as part of the process. The 20 concessions you note, no doubt a small part of that jigsaw. On Nord Stream, you really are preaching to the choir on that one fella, I’ve stuck my neck far further out on that than any European analyst (Poland’s best friend) http://www.europeanenergyreview.eu/site/pagina.php?id=3310

As for state based financing for resource plays, it is indeed an inescapable fact of history, and I expect Poland will (and should) follow in such footsteps. I was tentatively raised that Europe might start considering shale subsidies if things don’t take off – I can’t see that happening, but as with so much of the European energy debate, if you want new supply / geopolitical options, you normally have to pay for them. On Natural Gas Europe, good friends of mine as well. Cheers, Matthew